Define when considering psychological theories of savings

Reference no: EM13233887

Individual retirement accounts, or IRAs, were established by the U.S. government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income taxes on the earnings deposited, nor are any income taxes charged on the interest earned by the funds in the IRA. However, when the funds are withdrawn from the IRA, the full amount withdrawn is treated as income and is taxed at the individual's current income tax rate. In contrast, an individual depositing in a non-IRA account has to pay income taxes on the funds deposited and on interest earned in each year but does not have to pay taxes on withdrawals from the account. Another feature of IRAs
that is different from a standard savings account is that funds deposited in an IRA cannot be withdrawn prior to retirement, except upon payment of a substantial penalty.

a) Greg, who is five years from retirement, receives a $10,000 bonus at work. He is trying to decide whether to save this extra income in an IRA account or in a regular savings account. Both accounts earn 5 percent nominal interest, and Greg is in the 30 percent tax bracket in every year (including his retirement year). Compare the amounts that Greg will have in five years under each of the two saving strategies, net of all taxes.

If Greg invests in the IRA, his net value (after taxes) five years from now will be: $_____??

If Greg invests in the normal savings account, his net value (after taxes) five years from now: $________????

Greg will be better off if he invests in the .

b) In light of Greg's situation, does the existence of IRAs as an investment option increase his likelihood to save when considering the effect of changes in the real interest rate?

In light of Greg's situation, does the existence of IRAs as an investment option increase his likelihood to save when considering the psychological theories of savings?

Reference no: EM13233887

Questions Cloud

Age of exploration throught the columbian exchange : Write a paragraph on how on the impact of the impact of the Age of Exploration throught the Columbian Exchange Today.

Why is it that small businesses are at a disadvantage : Why is it that small businesses are at a disadvantage as they pursue non-Web-based international expansion strategies?

Explain unsymmetrical bond formation and produces a radical : Consider the following process. which of the following correctly applies? chose answere from the following answers. (a) termination step (b) polar reaction (c) unsymmetrical bond formation (d) produces a radical

Explain energy diagram for an enzyme-catalyzed reaction : consider the following energy diagram for an enzyme-catalyzed reaction. which step is probably the slowest? chose from the following answer.

Define when considering psychological theories of savings : Greg, who is five years from retirement, receives a $10,000 bonus at work. He is trying to decide whether to save this extra income in an IRA account or in a regular savings account. Both accounts earn 5 percent nominal interest, and Greg is in th..

Era of the pre revolution up to the era of napoleon : Was there democracy in the era of the pre revolution up to the era of Napoleon?

Define what mechanisms are related to the organization : Define what mechanisms are related to the organization's SWOT in order to unfreeze, change, and refreeze (Lewin's theory of change) HR/business practices across the global organization.

What is the velocity (speed) of the satellite : A 196.2 kg satellite is in a circular orbit of 26,273 miles (42,300,000 m) in radius. The force keeping the satellite in orbit is 42.1 N

Evaluate the current staffing plan : Evaluate the current staffing plan and what does it cost? Are 26 officers sufficient to handle the normal workload and what would be the additional cost of their chief's proposal? How would you suggest that he justify his request?

User Account

All Pages